Portugal: Another Significant Miss, And Another 140% Debt/GDP Case Study

Tyler Durden's picture

From Mark Grant, author of "Out of the Box and onto Wall Street"

The next country that could follow Greece out of Valhalla and down to meet Poseidon at Hades gates is Portugal. They trod the path once before but look likely to be headed out on a second journey. The country’s private and household debt are approximately 300% of the total GDP of Portugal and their economy is contracting; around 4.00% by some estimates. While the European Commission estimates a debt to GDP ratio of 111% for this year; the actual data tells another story. Further aggravating a future restructuring are the CDS contracts with a net position of $5.2 billion and a gross amount of $67.30 billion which is about twice the amount of the net exposure for Greece.

PORTUGAL

Total GDP                                               $208 billion
Short Term Debt                                    $ 99 billion
Long Term Debt                                     $ 96 billion
Troika Loan                                            $111 billion
Government Guaranteed Debt               $ 16 billion
Government Guaranteed Bank Loans     $ 24 billion

Debt to GDP Ratio                                 140%

The European Banks

There has been a lot of talk and discussion that the pressures on the European banks were lessened by the LTRO and this is certainly true in the short term. This also allowed the banks to step up their buying of their national debt and lower sovereign bond yields but this is about to change. The initial injection of liquidity, as I have discussed before, is only effective in the shortest of terms and then a reversal will take place as the easy money gets placed. Without even going into a discussion concerning the fact that these ECB loans will have to get paid back and the difficulties that this will cause or the speculation that the ECB will offer new loans when the old ones mature I can now point to exactly what is happening with the banks on the Continent that are domiciled in the weaker nations. First money is pouring out of these banks like some cascading river pouring down from the mountains as people and institutions want the relative security of banks that are headquartered in the safer countries. Remember that one part of the European construct is that it allows for a free movement of capital and that the big international banks have branches in most countries now. I point specifically to Greece, Portugal, Spain and Italy and to the announcement this morning by the Central Bank of Spain that the deposits in the Spanish banks declined 4.2% from a year ago as they also state that bad loans rose to 7.9%. In fact in the last month reported the Spanish bank outflows were 1.3% which would equate to 15.6% on an annualized basis. So the banks in the periphery are losing deposits, having to comply with the Basel III rules and have balance sheets that are chock full of the LTRO debt and now one can reasonably expect not just further downgrades but possible impairments as the LTRO liquidity does not solve their solvency problems and then as the sovereign debt floor begins to fall away and “real money” is sought; the major international bond buyers are now quite aware that the IMF/ECB/EIB are all senior to their bonds so that higher yields will be demanded for any purchases or some will just stay out regardless.

Everyone points to the problems being pushed out by the ECB loans but I remind everyone this morning that those same loans have a dark side and that is they are now on the balance sheets of those institutions that took outsized portions and that these loans weaken their financial positions so that it is quite possible that further actions by the ratings agencies will cause havoc as many may well lose their investment grade ratings. I also point to the buying of their own sovereign debt which was buoyed by the cash injection but then may well reverse as the austerity measures and the recession in Europe takes its toll on the sovereigns so that the pyramid built by the EU and the ECB may reach a point where it can no longer support its own weight. In the short term the ECB’s action noticeably helped but in the medium term the taste may become quite bitter as the consequences of the LTRO come to the fore. I also can report, though real information is not that easily obtained, that the ECB has begun to make quite sizeable margin calls on many European banks who pledged collateral for the LTRO loans that is rapidly diminishing in value. I advise you to keep a close eye on the line in the ECB’s balance sheet earmarked “Deposits Related to Margin Calls” as a large rise in this number could well take the bloom off the rose and in short order as the European banks have to square up and as the supply of good collateral vanishes into the wilderness